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Are FTSE travel shares like Carnival or International Consolidated Airlines Group cheap enough to buy now?

Despite the gradual relaxation of various Covid-19 restrictions, travel (especially international leisure travel) remains mostly off the cards for many people worldwide. And in 2020, investing in airlines and other travel shares has meant a capital loss for shareholders.

Today I’m taking a look at the share prices of cruise operator Carnival (LSE: CCL) and International Consolidated Airlines Group (LSE: IAG), the owner of British Airways and Iberia. Year-to-date, the stocks are down about 65% and 56% respectively, which means they’re clearly in bear market territory. Let’s see what market participants may expect for the rest of the year. 

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On 18 June, the group released disappointing Q2 results. A net loss of $4.4bn meant adjusted losses per share of $3.30. The year-ago quarter saw net income and EPS of $451 and 66 cents. Similarly, total revenue of $0.7bn was much lower than $4.8bn in the prior year.

The US Centers for Disease Control and Prevention (CDC) has a no-sail order for cruise ships operating in US waters. Although it’s set to expire by the end of July, it could be extended. Authorities in many other countries have also put cruises on hold.

Carnival can’t yet predict when it may return to normal operations. Thus management was unable to provide an earnings forecast. 

Our regular readers may remember that given the uncertainty the industry is facing, in late March Carnival axed its dividend. And as of 22 June, the company lost its place in the FTSE 100 index. It’s now a member of the FTSE 250.

International Consolidated Airlines

Airlines are capital-intensive business, requiring large amounts of money to operate safely and effectively.  In early May, FTSE 100 member IAG released Q1 results for the period to 31 March. It reported a £466.6m operating loss, down from £117.9m profit in 2019. Weekly cash burn stands shy of £180m. Like Carnival, IAG also suspended dividends earlier in the year.

Management expects flights to resume later in July. By the third quarter, IAG hopes to operate about 45% of capacity compared to the year prior.

However, it’s still too early to know what percentage of passengers will return to the skies when air travel begins and if management’s forecast will hold. Indeed, analysts estimate it will likely be two full years before passenger numbers return to early 2020 levels.

So should you invest in travel shares now?

Both CCL and IAG shares have had a problematic trajectory so far this year. And shareholders have lost confidence in travel shares.

But while the International Monetary Fund (IMF) says the global economy will contract 3% in 2020, for 2021, it forecasts robust growth. If you agree that these grey clouds may dissipate in the coming months, it may also be time to start investing in FTSE 100 travel stocks.

Today, if I had to choose between the two companies, I would go for IAG. Given the uncertainty as to when leisure travellers may return to the high seas, Carnival shares might not be suitable for every investor.

And for the medium term, I believe IAG stock is likely to recover better than CCL shares. However, as their dividends are now suspended, passive income seekers are unlikely to return to either stock.

Even with further recovery potential, I think there may be better bargains in the FTSE 100.

Here are more tips for long-term portfolios.

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tezcang has no position in any of the shares mentioned. The Motley Fool UK has recommended Carnival. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.